Your credit may be examined by lenders in a variety of ways if you apply for a mortgage. If your credit score is below average, looking for a home is a good time to improve it in order to purchase a home.
Lower scores are seen by lenders as a sign that you are less likely to repay the loan, though that risk can be reduced by raising your credit score. How to fix my credit to buy a house? Here are seven ways to improve your credit in order to buy a house.
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Credit Score Needed to Buy a House (By Loan Type)
500 is the minimum credit score required to buy a home and mortgage it. A buyer’s borrowing options increase as their credit scores rise.
According to official mortgage guidelines, the minimum credit score requirements for the four government-backed loans are:
- Conventional Mortgage: 620 credit score
- FHA mortgage: 500 credit score
- VA mortgage: 580 credit score
- USDA mortgage: 580 FICO
98% of first-time home buyers use government financing. The remaining 2% are made up of Jumbo Mortgages or other non-government loans, neither of which have a minimum credit score requirement.
A higher credit score is typically needed for jumbo loans than for loans with government backing.
7 Ways to Fix Your Credit Score
There are three main credit bureaus in the US: Experian, TransUnion, and Equifax. The weightings used in the three bureaus’ versions of the credit rating formula differ slightly.
Their models are private, but thanks to patent applications and open data, we have a solid understanding of what makes a credit score strong and how to raise it.
Take the following seven steps to repair your credit so you can buy a home.
Get Current With Your Bills
Why it works: 35% of your credit score is based on your payment history.
Your payment history is a record of the debts you have previously repaid to lenders, lessors, and credit card companies. The best payments are those made on time, though there is little harm done by a single 30-day late payment. 60-days late or longer, and bills in the collection are more damaging.
How to improve: Get your bills current, then keep paying them on time each month. You’ll notice a change in your credit score after three months. Your score can nearly fully recover after six months. If you must order things, pay your minimum credit card, auto, and student loan payments first. Afterward, settle the remaining balance on your credit card as well as any other outstanding debt.
Raise Your Credit Limits & Reduce Your Credit Balance
Why it works: 30% of your credit score is determined by the amount owed.
The ratio of available credit to credit being used is determined by the amount owed. It is a percentage rather than a fixed sum of money.
Using all of your available credit is known as being “maxed out.” Less than one-third of a consumer’s available credit should be used, according to credit bureaus. A credit utilization rate of more than 50% can lower your score.
How to improve: Your credit utilization ratio declines as limits increase. First, pay down your individual credit card balances until you’re using less than one-third of your available credit limit on each card.
Then, give your credit card companies a call and ask for a higher credit limit. Accept whatever new limit you receive and, if you are given the choice, decline to have your credit score checked as part of the increase.
Refrain from Opening New Credit Cards and Loan Accounts
Why it works: 10% of your credit score is based on new credit.
The new credit accounts you or another person opened in your name are considered new credit. Credit cards, student loan refinancing, and auto loans and leases all constitute new credit. It also includes store credit cards, which offer 10% off at the register. Because it makes users less able to pay other bills, credit bureaus view new credit negatively.
How to improve: Avoid applying for new credit with your social security number in the months before you buy a home. Pre-approvals are accepted as a necessary step in the home-buying process and barely affect your credit score. It’s risky to use new credit and store charge cards.
Keep Existing Credit Accounts Open
Why it works: 10% of your credit score is made up of consumer credit.
The assortment of credit accounts that make up your credit history is known as your consumer credit mix. Mortgages, auto loans, student loans, personal loans, and credit cards are examples of different types of credit. As part of your overall credit profile, the credit bureaus look at your mix of consumer credit to determine how you handle various account types. By keeping your other accounts open, you’ll naturally keep a healthy mix of credit.
How to improve: Even after you’ve gotten a credit card balance of $0, your work isn’t done. Keep the credit line open, make a small monthly purchase, and settle the balance in full when the invoice comes in.
You can compel your creditor to inform the bureaus that you borrowed money and promptly made the payments by paying them $5 each month. This is preferable to closing the account and watching it deteriorate or creating new accounts.
Fix Your Credit Report Errors
Why it works: Your score can be reduced by up to 100 points as a result of errors on your credit report.
A current Consumer Reports study found that one-third of U.S. consumers have errors in their credit reports which harm their credit scores. Credit report errors can link to criminal acts such as identity theft, but more often, they’re common mistakes like:
- A credit card company isn’t reporting your credit limit
- A paid-off student loan still says it’s active
- A charge card reported a late payment by mistake
Additionally, if you share a name or social security number with someone else, you might find that your credit report has been combined with theirs.
How to improve: A copy of your credit report will be given to you once your mortgage has been pre-approved. Your credit is not impacted by this. Instead, it can aid in the discovery of errors. Take a look at the data and implement the necessary corrections. Most errors are simple to fix online.
Find out more about the impact of mortgage pre-approvals on credit scores.
Use a Credit Builder Tool
Why it works: You may occasionally need assistance to improve your credit.
A credit-building tool can help consumers take back control of their credit reports and score. A person’s credit history is improved by using credit builder tools, which also aid in saving money.
How to improve: Experian, TransUnion, and Equifax are the three credit bureaus that are automatically notified and paid by StellarFi for all recurring bills that are processed through their platform. There are no payments of interest, no deposits, and no credit checks.
Be Patient
Why it works: 15% of your credit score is based on how long you’ve had credit.
Your average tenure managing your credit accounts is referred to as your credit history. Credit histories that are longer contain more data, making them more predicting of future behavior. Because they lack experience, consumers with recent credit histories rarely achieve extremely high credit scores.
How to improve: Time is the only factor that can increase your credit history length rating; it cannot be replaced. Even after you’ve paid them off, you can still help yourself by keeping old credit accounts open. Use your current, inactive credit cards to make purchases at least once per month. It is advantageous to make even small purchases of $5.
How Long Does It Take to Build Credit to Buy a House?
In just six months, many homebuyers can repair their credit enough to purchase a home. Additionally, scores get better each month after that.
Your ability to raise your credit score is virtually unlimited. You have control over your spending as well as your credit history, the age of your accounts, and the mix of credit cards you have.
Repairs may be more difficult for buyers with judgments, liens, or significant delinquencies, but they are still effective. Customers who have several tradelines can anticipate a rapid credit-building process. Customers with little credit history might need a little more time. But in every instance, two years will do.
How Are Credit Scores Calculated?
Credit scores are mathematical calculations based on a person’s history of bill repayment and borrowing habits.
Various companies have various approaches to credit scores. Credit scores in the context of mortgages indicate the likelihood that a homeowner will repay a lender on time over the following 90 days. Ninety days is significant because lenders reserve the right to retake possession of a home after 90 days of non-payment. Foreclosure is the name of this legal procedure.
The mortgage credit score algorithm generates a numerical output ranging from 300 to 850, where 300 denotes the highest risk of non-payment and 850 denotes the lowest risk.
Lenders group credit scores based on their value.
- Excellent credit is 740 or higher
- Good credit is between 680 and 739
- Average credit is between 580 and 679
- Below-average credit is between 500 and 579
- Poor credit is below 500
A credit score of 500 or higher is required for mortgage approval.
What Goes into a Credit Score?
A credit score is based on more than 50 factors that are divided into five categories.
- Your payment history
- Your borrowing habits
- Your track record
- Your recent attempts to secure more credit
- Your experience with different credit types
Each category and recency are given different weights in the credit score formula. Scores are more impacted by recent events than by those that occurred two years ago because recent events have a better ability to predict future events than those that occurred in the past.
As a result, starting now and waiting is the best course of action for raising your credit score.
Your credit score will significantly improve in the next six months.
Some notable traits don’t affect credit scores, including:
- age
- gender
- race
- religion
- national origin
- marital status
- political affiliation
- medical history
- criminal record
- whether you receive public assistance
- salary
- employer
- job history
Credit scores are only based on merit, and anyone can have perfect credit.
Now, do you know the calculation of your credit scores? Trying to fix your credit to buy a house if you need.
